GCR assigns first time ratings to Lagos State Govt.of Nigeria’s Series II Bonds(tranche III and IV)

31 Jan 2018 In Rating Notifications

GCR assigns first time ratings to Lagos State Govt.of Nigeria’s Series II Bonds(tranche III and IV)

Lagos, 31 January 2018—Global Credit Ratings has assigned first time ratings to Lagos State Government of Nigeria (“Lagos” or “the State”), Series II, tranche III and IV bonds at AA-(NG), with the outlook accorded as Stable.

The bond ratings are valid until August 2018.

RATING RATIONALE OF THE ISSUE

Following approval from the Securities and Exchange Commission (“SEC”), Lagos State Government has raised a combined sum of N97.4bn in Series II bonds (in four tranches), under the N500bn Bond Issuance Programme (“Programme 3”). Tranche I (N46.4bn) and tranche II (N38.8bn) bonds were issued in August 2017. Given that the State had received approval to raise up to N100bn in Series II bond issue, additional bonds of N6.9bn and N5.3bn were raised in tranche III and tranche IV respectively, in January 2018. Key details of the bonds are presented in the table below

Individual Sinking Fund Accounts are to be established for the tranches, and would be funded from transfers from the Consolidated Debt Service Account (“CDSA”) and Irrevocable Standing Payment Order (“ISPO”) approved by the Federal Government.

The net proceeds from the Bond Issues will be utilised to further accelerate development, with a significant amount to be allocated to the construction and upgrading of roads and bridges, tourist sites and facilities, arts and culture facilities, as well as the development of waterways transportation and upgrade of health, social and environmental facilities.

RATING RATIONALE OF THE ISSUER

Lagos State evidences the most diversified economy in Nigeria, which has allowed for some resilience amidst the weak economic environment. This has translated into robust growth in Internally Generated Revenue (“IGR”), which climbed 7% to N365bn in FY16 and by an annualised 17% to N213bn in 1H FY17, supported by improved income tax collection. Notwithstanding this,  the impact of lower oil prices coupled with the disruption of oil production by militant activities, resulted in a third consecutive decline in statutory allocations to N27.3bn in FY16 (28% decline from FY15). However, as statutory allocations account for only 7% of revenue, overall income recovered 7.5% to N413bn in FY16.

As a result of tighter controls and strict adherence to budgeted expenditure, recurrent expenditure declined 8% to N222bn. However, the 15% rise in staff costs to N104bn is concerning as it has raised staff cost to 47% of total expenditure (FY15: 38%), well above GCR’s 35% Benchmark. This notwithstanding, the operating surplus grew 33% to N191bn, resulting in a higher debt service coverage ratio of 4.9x (FY15: 1.4x). This is well above GCR’s benchmark of 2.5x.

In tandem with the State’s pace of economic, social and infrastructural development, ongoing capital projects were accelerated, as indicated by 24% rise in capex to N215bn, equating to a favourable 52% of income. However, as capex funding has relied heavily on commercial borrowings and bonds, gross debt climbed 26% to N780bn at FY16. Thus, gross and net debt to income rose to 188.7% and 179.6% (FY15: 161% and 155%) respectively.

Although, GCR considers the current debt levels to be manageable, capex forecasts suggest that the debt to income could climb above 200% at FY17 or FY18. If sustained, this could lead to lower interest coverage, especially in the event of renewed economic weakness. However, to the extent that the debt translates into more robust economic growth in the medium to long term, credit metrics are expected to ease going forward. Lagos has also indicated that there are no plans to incur additional debt in the short term.

Positive rating action could emanate from sustained improvement in the macroeconomic fundamentals of Nigeria, as well as Lagos’ improved performance relative to budget, continued growth in IGR and improved collection efficiencies. Conversely, as GCR considers the gross quantum of debt to be high, any revenue underperformance and/or further increases in the debt burden could place pressure on the State’s ratings.

NATIONAL SCALE RATINGS HISTORY

ANALYTICAL CONTACTS

Primary Analyst
Kunle Ogundijo
Lagos
+23 41 462 2545
.(JavaScript must be enabled to view this email address)


Committee Chairperson
Dave King
Chairman
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Public Entities, updated February 2017
Lagos State Government Rating Reports (2012 – 2016)
Glossary of Terms/Ratios (February 2015)


RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.COM.NG.

SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity; d) the ratings are valid until August 2018.

Lagos State participated in the rating process via face-to-face management meeting, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit ratings have been disclosed to Lagos State with no contestation of the ratings

The information received from Lagos State Government of Nigeria and other reliable third parties to accord the credit rating included;
- the audited accounts for the year ended 31 December 2016 (plus four years of comparative numbers);
- the half-year management accounts to June 2017
- the approved budget for 2017
- the Joint Trustees reports on the existing bonds (N80bn, N87.5bn and N47bn bonds) for the period ended 31 August 2017
- a breakdown of facilities available and related counterparties

In addition, copies of the signed executed transaction documents were received, namely;
- Tranche I pricing supplement
- Tranche II pricing supplement
- Tranche III pricing supplement
- Tranche IV pricing supplement
- Tranche I trust deed
- Tranche II trust deed.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES.  GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

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